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Factories hire more staff amid fastest growth for 20 years: Manufacturing output figures boost pound Traders say rise in interest rates this year possible

July 2, 2014

Katie Allen

Factories are hiring new staff to keep up with rising demand as Britain's manufacturing output grows at its fastest pace for a generation, according to a closely watched business survey yesterday.

The report showing factory activity growing ahead of expectations in June and at its fastest pace for seven months - with output in the second quarter increasing at the fastest pace for 20 years - helped lift the pound to its highest level since the onset of the financial crisis.

Separate figures showed output per worker and output per hour fell in the first quarter, raising questions over the sustainability of economic growth and dampening prospects that wage growth will recover.

Financial markets focused on the manufacturing report, however, and the pound gained about 0.25% to $1.7162, the highest level since the autumn of 2008. Sterling was helped against the dollar by a US report on manufacturing that missed expectations.

Traders said the latest evidence that the UK's recovery was becoming more broad-based increased the chances that the Bank of England will raise interest rates before the end of the year from their record low of 0.5%.

In the UK the headline index on the Markit/CIPS manufacturing purchasing managers index rose to 57.5 from 57 in May. That was well above the 50 mark separating growth from contraction and ahead of forecasts for a fall to 56.8 in a Reuters poll of economists.

The business survey also showed domestic and overseas orders picking up and hiring at a 39-month high.

Martin Beck, senior economic adviser to the EY ITEM Club, said the poll signalled official figures on manufacturing would show growth had accelerated in recent months.

"June's PMI adds to other evidence that GDP growth may have picked up pace in the second quarter. We expect a quarterly expansion of around 1%, which would be the highest rate since 2007," he said.

But while signs that manufacturing was finally climbing back up to its pre-crisis strength after being hit hard in the recession were welcomed, official data on productivity was viewed as less upbeat.

The Office for National Statistics said output per worker and output per hour slipped 0.1% in the first quarter of this year. Compared with a year earlier, output per worker was up 0.6% and output per hour was up 0.4%. Both measures are well below their pre-crisis peaks.

Economists and Bank of England policymakers have been puzzled over why productivity in the UK has not recovered faster. There have been questions over whether the lost productivity will be regained as the economy recovers - in other words the shortfall is down to cyclical factors - or whether at least some of the loss is permanent, or down to structural factors.

Howard Archer, an economist at IHS Global Insight, said : "We suspect that there is appreciable scope for many companies to ultimately make more use of their existing workforce. We are also hopeful that the recent marked pick-up in business investment will have positive implications for future productivity growth."

In the nearer term the Work Foundation thinktank warned that flat productivity growth would keep wages subdued.

"There is little scope for many employers to significantly increase wages, and the pressure on living standards, for many in the labour market, will continue," said Work Foundation chief economist Ian Brinkley.

The UK's manufacturing performance for June was in contrast to the eurozone, where factory activity lost momentum. Markit's eurozone manufacturing PMI dipped to a seven-month low of 51.8, down from 52.2 in May.

Factories in France performed worst, with the PMI there dropping to a six-month low of 48.2, showing the manufacturing sector contracting.

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Source: Guardian (UK)

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